2015 (5) TMI 605 - AT - Income Tax

G.P. addition - rejection of books of accounts - Held that - Here in this case when existence of Consortium is not doubted the only issue remains if letting out the entire job to one of the party of the Consortium was a fact or not in the case and consequent payments made were excessive or not. For the same the appellant has placed heavy reliance upon the decision in the case of CIT vs. M/s.Ray Bel Consortium given by Hon ble Bombay High Court 2012 (7) TMI 372 - BOMBAY HIGH COURT . As gone through the same which deals with sec.40A(2) and supports the case of the appellant and hence of the considered opinion that books of account were not liable for rejection and there was no requirement for estimating profit when the same has been reflected on the actual basis. - Decided in favour of assessee. Disallowance of water charges and sewerage charges - AO disallowed water and sewerage charges treating that loss as reimbursement of expenses to sub-contractor. The AO also made addition of receivable on account of work contract tax refund - CIT(A) deleted the addition made by the AO by estimating profit at 10 of the gross receipts by observing that assessee is only special purpose vehicle in the form of joint venture - Held that - Respectfully following the decision of the jurisdictional High Court in case of M/s Ray Bel Consortium (supra), we do not find any infirmity in the order of CIT(A) for deleting the addition made on account of profit estimation as well as disallowance of amount deducted by municipal corporation on account of water and sewerage charges. Further the CIT(A) has upheld the addition on account of tax refund which was deducted by Municipal Corporation of Brihan Mumbai. As per our considered view, the amount of income tax refund is not in the nature of income but was on account of refund of tax deducted by municipal corporation as no income accrued in respect of these contracts in assessee s hand. This refund is also required to be passed on by the assessee to the two members of AOP. Accordingly, we direct the AO to verify the same and decide the issue afresh. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Rejection of books of accounts and estimation of profit.
2. Allowability of water and sewerage charges.
3. Taxability of work contract tax refund.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Profit:
The Revenue contended that the CIT(A) erred in holding that the books of accounts of the assessee were not liable for rejection and there was no requirement for estimating the profit. The assessee, a special purpose vehicle (SPV) in the form of a joint venture, subcontracted the entire work to its two members and showed nil income. The AO rejected the books of account and estimated the profit at 10% of gross receipts. However, the CIT(A) deleted this addition, observing that the consortium's existence was not doubted and the work was executed by its members, thus no income accrued to the SPV. The CIT(A) relied on the jurisdictional High Court decision in M/s Ray Bel Consortium, which held that income accrues in the hands of the members who execute the work. The ITAT upheld the CIT(A)'s decision, noting that the SPV was merely an allotment vehicle and any income accrued to its members.

2. Allowability of Water and Sewerage Charges:
The Revenue argued that the CIT(A) erred in allowing water and sewerage charges as expenses, even though the entire work was subcontracted. The AO disallowed these expenses, treating them as reimbursements to subcontractors without TDS deduction. The CIT(A) allowed these expenses, noting that they were deducted by MCGM from the gross receipts and thus related to the business of the assessee, allowable under Section 37 of the Income Tax Act. The ITAT agreed with the CIT(A), stating that the expenses were shown in the P&L account because they were deducted by MCGM, and there was no need for TDS deduction as there was no principal-agency relationship.

3. Taxability of Work Contract Tax Refund:
The assessee contended that the CIT(A) erred in confirming the addition of work contract tax refund, which was already offered for taxation. The AO included the refund in the assessee's income. The CIT(A) upheld this addition, stating that any refund from work contract tax should be considered as income in the year it is reflected. The ITAT, however, concluded that the refund was not in the nature of income but a refund of tax deducted by MCGM, which should be passed on to the two members of the AOP. The ITAT directed the AO to verify and decide the issue afresh.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, upholding the CIT(A)'s deletion of profit estimation and disallowance of water and sewerage charges, while directing the AO to reassess the tax refund issue.